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Lack of credit demand: How will banks find their mojo back?

Retail portfolios are seeing stress but overall asset quality deterioration has been far lower, compared to the first wave of COVID-19. But there is one thing missing.

August 12, 2021 / 12:33 PM IST

Vaibhav Agrawal, CIO, Teji Mandi

Encouraging trends have emerged from the banking sector, post Q1FY22 results. All major banks -- private as well as PSUs -- have reported improved operational efficiency. Management commentaries have also been largely positive.

Deposit growth has remained healthy. Retail portfolios are seeing stress but overall asset quality deterioration has been far lower, compared to the first wave of COVID-19. Collection efficiency has improved, and corporates are seen deleveraging. Restructuring books have remained under control, and the requirement for additional provisioning has come down.

Despite the visibly improved performance, one major cog remains missing in the wheel - sluggish disbursements and muted trends in loan growth.

As the second wave of COVID-19 continues to take its toll on Micro, Small and Medium Enterprises (MSMEs) and the employment scenario gets blurred, stress is seen building up in the retail portfolio. It has resulted in lower credit demand. Banks have also become risk-averse and are tightening their underwriting criteria, resulting in lower demand.


Ingredients falling in place?

Credit growth in India's banking system has remained muted in the range of 5.5-6.5 per cent in the last couple of years. As per the latest RBI policy, credit by commercial banks grew by 6.5 per cent, as of July 16, 2021, despite the ample liquidity in the system, followed by historic low interest rates.

However, there are plenty of signs that should support credit growth in the long term. India's exports continue to make a record high, touching $35.2 billion in July. Imports, in the meantime, are surging again as merchandise imports shot up to $46.4 billion. India being dependent on the import of raw materials for its industrial activities is a sign of a pickup in domestic activities.

The government's extensive focus on MSMEs and infrastructure through the ECLG (Emergency Credit Liquidity Guarantee) and PIL (Production-Linked Incentive) schemes would help in improving the private capex cycle in the near future to increase credit requirements in the country.

Growing count of positive factors

As business activities rush towards normalisation, the market is flooded with plenty of liquidity at cheap interest rates. Further, corporations have gone through extensive deleveraging and improved their balance sheets. And market consolidation in favour of larger players across the sectors is signalling a possibility of a massive capex cycle.

Banks have also improved their balance sheets with higher provisions and fresh credit infusion. The government's recent efforts, like the formation of bad banks, is expected to shift significant stress off their books, while the Insolvency & Bankruptcy Code (IBC) amendment could well speed up the resolution of stressed assets, going ahead. A combination of these factors would add to the operational stability of banks and help them to shed their reservations against fresh lending to stressed sectors.

Closing comments

Consumer sentiments will be a big influencing factor for the revival of the private capex cycle. Pickup in demand will incentivise companies to take up expansion.

For that, the government would need to contemplate shifting its fiscal stimulus policy. So far, it has been extensively focused on strengthening the supply side. However, as the festival season is approaching, it may not be a bad idea to switch strategies and start adopting demand-boosting measures.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Vaibhav Agrawal
first published: Aug 12, 2021 12:33 pm

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